How Yahoo (YHOO) Blew The Microsoft (MSFT) Deal, Part 1

The most interesting story to emerge since Microsoft (MSFT) withdrew its bid for Yahoo (YHOO) is that the companies are disputing the circumstances of Microsoft's $33 offer. This is important for three reasons:

It suggests that Yahoo knows that its insistence that Microsoft's offer "substantially undervalued" the company won't pacify (or persuade) burned Yahoo shareholders. Instead, the company appears to be saying "If only we had known they would really pay $33, we'd have acted differently."

It suggests that Microsoft may have been looking for an excuse to walk--and that Yahoo misjudged this. This makes sense, given that Steve Ballmer appears to have soured on the combination.

It might lend credence to the theory that this is just another negotiating tactic by Microsoft--a card played in the hopes that Yahoo's enraged shareholders will force the company into a deal. A source close to Microsoft does not think this is the case--and neither do we.

Our initial conclusions? First, Microsoft walked away in part because of price and in part because Steve Ballmer lost his enthusiasm for the deal. In our opinion, this makes a future deal less likely (especially over $33). Second, Yahoo misjudged Steve Ballmer's commitment to the transaction and, as a result, blew it.

BACKGROUND

Team Yahoo is suggesting the Microsoft's $33 offer was "purposely vague"--i.e., that it wasn't actually a real offer (CNBC story here and a source we spoke to says the same). In fact, one WSJ source said some folks on Team Yahoo only learned about the increased bid in Steve Ballmer's sayonara letter. Our Yahoo source says Microsoft merely told Yahoo it would raise its offer "a few dollars," but refused to specify whether this meant a few dollars from the then-value of $29 or the original bid of $31, whether the new offer was cash or stock, etc.

The desired implication here is that Microsoft didn't really raise the bid (which would offer Yahoo's board an excuse for passing on a $33 bid). If it is true that Microsoft's increase was "purposely vague," it's also possible that Microsoft either wanted an excuse to walk ("Look, we raised our bid, and they still scoffed at it!") OR that Microsoft wanted Yahoo shareholders to think Yahoo's board had scoffed at $33 so a shareholder rebellion would force the board to sell at $33 or below.

Meanwhile, Team Microsoft vigorously disputes this account, saying that Microsoft General Counsel Brad Smith delivered the $33 offer to Yahoo board lawyer Ron Olson on Friday, a whole day before Jerry Yang and David Filo met with Steve Ballmer on Saturday. A source close to Microsoft says further that Yahoo never even asked whether this $33 offer was cash or stock. The message Yahoo delivered in Saturday's meeting, this source says, was that Yahoo's board wanted $37 and Jerry and David actually wanted $38 and that $33 wasn't in the ballpark.

Yahoo CYA?

In our opinion, this whole dispute reads like ass-covering on the part of Yahoo. The only reason Yahoo would float this item into the press, we think, is in the hope that Yahoo's board will be forgiven for passing on a $33 bid. Even if Microsoft was looking for an excuse to walk--and, therefore, made the offer "purposely vague"--this still doesn't explain why Yahoo's board didn't jump on it.

Based on Yahoo's public statements to this point, Yahoo has been trying to convey the impression that Microsoft's bid was so low as to barely be worth taking seriously. It's therefore hard to see how it matters how serious Micrsoft's $33 offer was: If Yahoo's position was "$37+ or nothing," why are the details of how the $33 offer was conveyed even worth going into--unless you're trying to explain, in hindsight, why you made decisions that ultimately blew the deal.

What Really Happened: Yahoo Gambled And Lost?

Based on this $33-offer dispute, it seems likely that Yahoo underestimated the possibility that Steve Ballmer would pull up the stakes and walk--and, therefore, was trying to hold out for a higher price. Oops.

Just Another Poker Bluff From Card-Player Ballmer?

Is Microsoft's bid withdrawal just another bluff? It's possible. Steve's a card player, and he and his advisors probably foresaw the shareholder storm that is now walloping Yahoo--as well as the chance that this storm could be so intense that it could force Yahoo into a deal.

His ceiling really was $34-ish, and it probably seemed that Yahoo just wasn't going to get there.

His enthusiasm for the deal had waned over the past two months--as many of his own shareholders, Yahoo management, and the press peed all over the combination.

In short, we think Steve walked because he just wasn't that eager to do the deal anymore. And given Yahoo's position since the bid was announced, we don't blame him.

The only chance a deal like this would have of working would be if both companies were completely committed to making it work. And it's hard to see how Steve ever would have gotten that level of enthusiasm from Yahoo--when Jerry, David, and the board have spent every waking minute for the past three months doing everything they could think of to avoid a fate they apparently considered worse than death: a Microsoft takeover.

How Yahoo (YHOO) Blew The Microsoft (MSFT) Deal, Part 1

A dispute about the circumstances of Microsoft's bid increase to $33 is revealing. First, it suggests that Yahoo knows the "substantially undervalued" argument isn't cutting it with angry shareholders. Second, it suggests that Microsoft was looking for an excuse to walk.